Life Interest and Remainder Interest

Life interest

A life interest is an exempt asset unless included in one of the exceptions (under paragraph 52(1) (c) of the VEA). A life interest does not form part of a trust. A life interest that is granted to a person under a will that also establishes a testamentary trust is not an asset of the testamentary trust but rather is an asset of the person to whom the life interest is granted.

Remainder interest that does not form part of a trust

On rare occasions a remainder interest may not form part of a trust. If a person creates a life interest via their will and provides in that will for the remainder interest to go directly to a third party without creating a trust, the remainder interest will not form part of a trust. In this case, the remainder interest is assessed under the normal rules and the trusts and companies rules do not come into play. The remainder interest in this instance is exempt unless it meets one of the exceptions under paragraph 52(1) (h) of the VEA.

Example of life interest and remainder interest not forming part of trust

Clark's will creates a life interest in the farmland he owned to his wife Lois, with the farm to go to their son Lex on Lois's death. Clark's will states 'I give a life interest in the farmland to my wife Lois, and the remainder interest in the farmland to my son Lex'. In this case, Clark's will allows 2 titles to be created in the farmland, one in relation to the life interest granted (to Lois) and one in relation to the remainder interest granted (to Lex). Both these interests are saleable and no trust is created.

However, Clark's will might instead state 'I give a life interest in the farmland to my wife Lois, and once Lois has passed away I give the farmland to those children of mine who are alive at that time'. In this case, no present entitlement exists in the remainder interest in the farmland for Lex and any other children of Clark until Lois has passed away, so the remainder interest is held as part of a trust which will be assessable under the trusts and companies rules.

Remainder interest that forms part of a trust, established after 31/3/01

A remainder interest may form part of a trust, especially if the remainder interest is established by a will, which also creates a testamentary trust. If a remainder interest is part of a trust, it is an asset of that trust and may be assessable against the controller of the trust, unless it is an exempt asset for that controller. To determine the value of a remainder interest, an actuarial valuation is required.

Example of life interest and remainder interest forming part of trust, established after 31/3/01

Jennifer (68) is the beneficiary of Reg's (her late husband's) will. Reg left Jennifer a life interest in a $300,000 investment property, which the actuary has valued at $95,000. Reg and Jennifer have one daughter, Sharon, who is to receive the $300,000 investment property absolutely on Jennifer's death. Sharon therefore has a conditional interest in this property that will be realised on Jennifer's death. The remainder interest that remains in the trust until Jennifer's death has a value determined by the actuary to be $180,000. This remainder interest is contained within the testamentary trust and may be attributed to the controller of the trust, depending on who the controller is. If the controller is Jennifer, she will be attributed with the remainder interest. If the controller is Sharon, however, Sharon will not be attributed with the value of the remainder interest, as it is an exempt asset for her, being created by someone other than Sharon or her spouse.

Remainder interest that forms part of a trust, established before 31/3/01

If an individual is the controller of a trust containing a remainder interest, and this trust was activated prior to 31 March 2001, that person will not be attributed with the remainder interest even though they are the controller of the trust. This concession was considered appropriate to allow people time to rearrange their financial affairs, and to avoid an attribution percentage being applied to those who could not alter the arrangements surrounding their interest in a testamentary trust.

Example of life interest and remainder interest forming part of trust, established before 31/3/01

David had established a testamentary trust and life interest as part of his will to allow his partner, Winifred, to use an investment property for the remainder of her life (i.e. Winifred has a life interest in this investment property). On Winifred's death this property will pass beneficially to the couple's son, Geoff. David passed away in August 2000, leaving Winifred as trustee of the testamentary trust. As David's death was prior to 31 March 2001, the remainder interest that would generally have been considered an asset of the trust and attributed to Winifred as the trust controller, will not be assessed as an asset of the trust and therefore not attributed to Winifred.

A trust created by a will (testament) which usually takes effect upon the death of the writer of the will.

A remainder interest is created when the owner of an asset transfers the legal title of the asset to another person and retains, or grants to a third person, an interest in the asset for life or a specified length of time. The interest held by the person is called a remainder interest. The person does not gain the benefit of their interest until the original owner's interest ends.

An exempt asset is one that is disregarded when calculating the value of a person's assets under the assets test. Examples of exempt assets include:

acquires the right to use assets or the income produced by those assets, or

transfers a non-exempt asset to another person, but retains an interest in the asset, or

is created by the will of a deceased individual.

A life interest remains current until the pensioner:

dies,

sells the asset, or

formally surrenders the asset.

An entity means any of the following:

an individual,

a company,

a trust,

a business partnership,

a corporation sole,

a body politic.

A remainder interest is created when the owner of an asset transfers the legal title of the asset to another person and retains, or grants to a third person, an interest in the asset for life or a specified length of time. The interest held by the person is called a remainder interest. The person does not gain the benefit of their interest until the original owner's interest ends.

A life interest arises when a pensioner:

acquires the right to use assets or the income produced by those assets, or

transfers a non-exempt asset to another person, but retains an interest in the asset, or

is created by the will of a deceased individual.

A life interest remains current until the pensioner:

dies,

sells the asset, or

formally surrenders the asset.

A remainder interest is created when the owner of an asset transfers the legal title of the asset to another person and retains, or grants to a third person, an interest in the asset for life or a specified length of time. The interest held by the person is called a remainder interest. The person does not gain the benefit of their interest until the original owner's interest ends.

An exempt asset is one that is disregarded when calculating the value of a person's assets under the assets test. Examples of exempt assets include:

A remainder interest is created when the owner of an asset transfers the legal title of the asset to another person and retains, or grants to a third person, an interest in the asset for life or a specified length of time. The interest held by the person is called a remainder interest. The person does not gain the benefit of their interest until the original owner's interest ends.

Attribution percentage is the percentage of income or assets in the private trust or company that will be taken to be the income and assets of the pensioner for the purpose of the income and assets tests. This only applies if the pensioner (or spouse) is determined to be a controller of the private trust or company.

Trustee has two meanings depending on the context, (i) and (ii).

(i) a person who looks after someone else's affairs

According to section 202 of the VEA, a trustee is a person appointed by the Commission to administer the financial affairs of a pensioner who may be incapable of managing their own affairs for reasons such as:

age,

infirmity,

ill health, or

improvidence.

These criteria include circumstances where a pensioner has a psychiatric disorder or a mental illness as a result of alcohol or drug addiction.

A trustee can be appointed, with or without the consent of the pensioner and once appointed, a trustee has full control of the pension payment.

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